19 Apr 2018

SCC says “No” to Unrestricted Inter-Provincial Free Trade

Today the Supreme Court of Canada issued its highly anticipated decision on free trade within Canada. The decision concerned the New Brunswick legal regime that restricts the imports of beer, wine, and other alcoholic beverage products into the province, but it has implications for the regulation of inter-provincial trade across Canada.

The appeal arose from the activities of a resident of New Brunswick who made a trip to Quebec in October 2012 to stock up on inexpensive beer and spirits. He was stopped by police upon returning to New Brunswick, charged under a provision of the New Brunswick Liquor Control Act, and fined $240 plus administrative fees and a victim surcharge levy. The provision at issue places strict limits on the amount of liquor that a resident is permitted to possess in New Brunswick from any source other than the New Brunswick Liquor Corporation — the Crown corporation that maintains a statutory monopoly on the importation, distribution, transportation and sale of beverage alcohol products in the Province. This has the effect of restricting imports of liquor products across New Brunswick’s borders.

The New Brunswick Provincial Court dismissed the charge on the basis that the relevant provision under the Liquor Control Act infringed section 121 of the Constitution Act, 1867, which provides that all articles grown, produced, or manufactured in any of the provinces shall “be admitted free” into each of the other provinces. While the New Brunswick Court of Appeal denied leave to appeal, the Supreme Court of Canada granted leave to hear the substantive constitutional issue at the heart of this case.

Canada’s highest Court ruled that section 121 prohibits laws that “in essence and purpose restrict trade across provincial borders”. It considered that “laws that only have the incidental effect of restricting trade across provincial boundaries because they are part of broader schemes not aimed at impeding trade do not offend s. 121 because the purpose of such laws is to support the relevant scheme, not to restrict interprovincial trade”. Thus, while the section 121 “prohibits governments from levying tariffs or tariff-like measures (measures that in essence and purpose burden the passage of goods across a provincial border)”, it “does not prohibit governments from adopting laws and regulatory schemes directed to other goals that have incidental effects on the passage of goods across provincial borders”.

In the view of the Court, the first question is whether the essence or character of the law is to restrict or prohibit trade across a provincial border, such that it functions like a tariff. Tariffs, broadly defined, are “customs duties and charges of any kind imposed on or in connection with importation or exportation”. In order to show that a law contravenes section 121, a claimant must establish that the law distinguishes goods in a manner “related to a provincial boundary” that subjects goods from outside the province to additional costs. The additional cost “need not be a charge physically levied at the border, nor must it take the form of an actual surcharge; all that is required is that the law impose a cost burden on goods crossing a provincial border”.

The Court further elaborated that laws that have the effect of restricting trade across provincial boundaries will not violate section 121 if their primary purpose is not to impede trade, but to fulfil some other objective. However, where the primary purpose of the broader scheme is to impede trade, or if the impugned law is not connected in a rational way to the scheme’s objective, the law will violate section 121. In this regard, the Court considered that “a rational connection between the impugned measure and the broader objective of the regulatory scheme exists where, as a matter of reason or logic, the former can be said to serve the latter”.

A quick read of the decision indicates that the Court was faced with an issue that has been considered many times by international trade panels, including the Appellate Body of the World Trade Organization, which is the world’s ultimate multilateral forum for the resolution of trade disputes. The Court had to strike a balance between the principles of free trade and the “regulatory space” of provincial governments to regulate. It’s reasoning bears some of the key hallmarks established by the Appellate Body, including the requirement for a “rational connection” between the restriction on trade and the objective of the government measure. Although further study is required, the Court’s reasoning also appears to avoid the subjective pitfalls of the “aim and effects” test, wherein the legality of a measure is assessed in the light of its own aim and effects. Such an approach has been rejected by the WTO Appellate Body.

While the assessment of the legality of such a measure before a trade panel or the WTO Appellate Body would be much more rigorous, it will be an interesting debate whether the outcome would have been any different.  No doubt there will be much written on this important decision.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com